The country’s liquidity extends to all the liquidity of all the country’s governmental administration, all the country’s government institutions and other agencies that are governed by the Parliamentary legislation regarding the maintenance of governmental accounts and accounting.
The country’s liquidity encompasses cash-on-hand held in various financial institutions, available drawing rights on lines of credit with the financial institutions and non-mortgage-backed securities.
The administration of the country’s liquidity is focused on the following objectives:
• That the country always has the necessary liquidity available to pay its liabilities;
• That the country’s liquidity is well-administered with a focus on security, and;
• That the country’s liquidity earns market-rate interest.
The legislative provisions governing the country’s liquidity can be found in the Parliamentary Act on the Faroe Islands Governmental Bank and the Systemic Risk Advisory Council under §§ 10-12. Pursuant to § 11, paragraph 1, the country shall maintain a minimum level of liquidity of 15% of the previous year’s GDP.
Daily liquidity is the liquidity that the national government and the institutions under the aegis of the national government have available for daily operations. The liquidity for daily operations is maintained in Faroese financial institutions. The provisions governing the deposits in Faroese financial institutions are available here.
The main purpose in maintaining a minimum liquidity is to ensure the continued operation of the country in difficult times with little revenue from taxes and duties.
In addition, another goal is to provide the Faroese Government the potential to revise the functioning of the National Treasury during difficult times so that the Treasury with appropriate actions can minimize any deficit and thereby ensure better loan facility terms.
In recent years, the minimum liquidity requirement has been incorporated into the Bank’s loan facility strategy such that any loan in a particular year is not greater than the minimum liquidity. This strategy thus ensures that the country always has funds available for the next loan repayment installment.
Within approved risk limits, liquidity is invested in securities so that the return on investment is as good as possible. In the main, liquidity is placed in easily traded securities (government bonds or mortgage-backed bonds. See investment authority here.